AS PESO TRADES AT 11-YEAR LOWS: BSP managing excessive volatility

February 26, 2018

The Philippines central bank is selling its dollar reserves as a defensive measure to manage excessive volatility driven by speculation against the peso, which is hovering near 11-year lows, the bank’s governor said yesterday.

“BSP sells foreign exchange from its reserves to manage excessive peso volatility,” said BSP Governor Nestor Espenilla, adding that the tongue cancer he had been diagnosed with in November was successfully treated and he was closely monitoring the financial markets.

The Philippine peso closed at an 11-year low at 52.34 pesos per dollar on Monday. It ended the week at 51.89.

The central bank chief also dispelled market concern that a cut in banks’ reserve requirement ratio would accelerate inflation, which hit 4.0 percent in January, the highest since October 2014.

“What BSP is executing is just an operational adjustment that should have a neutral effect on the monetary policy stance,” Espenilla told reporters, calling the fears of ensuing looser monetary policy “unfounded”.

On Feb. 16, the central bank cut banks’ reserve requirement ratio by 1 percentage point to 19 percent. The rule, which will take effect in March, is expected to inject more than $1.5 billion in liquidity.

Speculators, Espenilla said, are using the reduction as a factor that could dampen the peso.

The central bank lowered the reserve requirement to promote a more efficient and level financial system that is less biased against deposit-taking financial institutions, Espenilla said.

“The bottom line, the BSP has many options to maintain firm monetary control,” he said.

Policy setting has remained steady since the central bank raised rates by 25 basis points in September 2014.

The interest rate on the BSP’s overnight reverse repurchase (RRP) facility remains at 3.0 percent. The corresponding interest rates on the overnight lending and deposit facilities were also kept unchanged.

Francisco Dakila, BSP Managing Director, said the Monetary Board’s decision was based on its assessment that while latest baseline forecasts show higher inflation outturns for 2018, the inflation path is expected to moderate and settle within the inflation target range of between 2 and 4 percent in 2019.

Dakila said latest baseline forecast show inflation for 2018 will likely reach 4.3 percent and 3.5 percent for 2019.

“During the last Monetary Board meeting (December 14, 2017), tax reform was not included in the baseline forecast. Now that train law has been passed, the baseline assessment now includes the TRAIN impact,” Dakila said.

Dakila added that the continued rise in global crude oil prices and the faster outturn in January also contributed to the higher forecast.

Consumer prices increased at a faster rate in January, primarily due to the higher annual increment in the heavily-weighted food and non-alcoholic beverages and the double-digit mark-up for alcoholic beverages and tobacco.

Inflation in January stood at 4 percent from 3.3 percent the previous month and 2.7 percent in the same month last year.

January’s inflation was the fastest in more than three years, almost beating October, 2014’s 4.3 percent rate.

The higher inflation in January is also due to better enforcement of tax laws on tobacco as well as temporary increases in prices of selected food items, such as fish and vegetables, according to the Monetary Board.

The Monetary Board also noted that prospects for domestic activity continue to be firm on the back of robust domestic demand, manageable growth in credit and liquidity, and a sustained recovery in global economic growth.

The Monetary Board also observed that the risks to the inflation outlook remain weighted toward the upside owing mainly to price pressures emanating from possible further increases in global oil prices.

At the same time, the Monetary Board saw that inflation expectations continue to be anchored within the inflation target band over the policy horizon.

Given these considerations, the Monetary Board reiterated that it remains committed to the BSP’s price stability objective and will continue to closely monitor the evolving conditions for prices and output for any threats to the inflation target. –Reuters

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